Opportunity for Fisher & Paykel Healthcare

This story features FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED. For more info SHARE ANALYSIS: FPH

With a potential end in sight for Fisher & Paykel Healthcare's covid benefits the company looks to prove its ventilation devices have a place outside of intensive care units and rebuild utilisation rates for a sustainable outlook.

-Fisher & Paykel Healthcare’s full year guidance has disappointed on a miss in hospital consumables revenue
-The market anticipates turbulence ahead for the company as the healthcare industry normalises
-Significant opportunity remains for the company in utilising an expanded base of installed devices

By Danielle Austin

Benefits of the covid pandemic were never going to sustain Fisher & Paykel Healthcare’s ((FPH)) earnings forever, but an update on full year guidance from the company has disappointed the market given its sharp decline from last year’s result.

The company has guided to full year revenue of NZ$1.68-1.70bn, at the mid-point a -14% decrease on the previous year’s result and largely missing market forecasts. Company commentary focused on a second half miss on hospital consumables revenue as a driver of the disappointing full year guidance, despite being in line with first half results at around $450m.

No profit guidance was provided, but management did warn, as it had flagged at its result release in February, of pressures from rising freight costs.

Market analysts have attributed the year’s weak finish to the rapid decline in covid cases, and particularly hospitalisations. The revenue impact has highlighted the importance of covid hospitalisations to Fisher & Paykel’s current earnings profile, and the market predicts earnings will continue to decline as the pandemic recedes. While the company has benefitted from heightened demand during the pandemic, opportunity remains in driving adoption of its devices outside of hospital intensive care units.

An increase in high flow cannula device installation through the pandemic offers opportunity for Fisher & Paykel to leverage to support its earnings outlook. Covid hospitalisations requiring respiratory intervention drove an increase in device demand, with the company suggesting it has sold the equivalent of five years of hardware in the last eighteen months. As the healthcare industry normalises, the company looks positioned to focus on the utilisation on the existing device base, now almost double the size of the pre-covid device base.

According to JP Morgan, if historic utilisation rates can be achieved with the newly increased device base it represents a potential $300m additional recurring revenue opportunity for the company. While the broker notes this implies a 40% benefit to profits, it warns it will take some years to realise benefits. The larger device base does, however, support a growth outlook for the company and provides some market confidence.

Company commentary suggests recovery of utilisation levels to pre-covid standards will take at least three years. JP Morgan analysts anticipate utilisation lows have a hit a low in the current half and will slowly rebuild in the next year. The company will report on full year results in late May.

Omicron driving less need for respiratory intervention than predecessor variants

Where earlier covid variants, particularly delta, drove a strong demand for ventilators from Fisher & Paykel, the now more prevalent omicron has triggered less need for respiratory intervention and a slowing of demand for the company’s devices.

In addition to this, the northern hemisphere flu season has been comparatively mild, likely due to increased hygiene and social distancing habits enforcing throughout the covid pandemic, further negating need for devices in intensive care settings and accounting for slow consumables sales.

Despite this, commentary was largely positive on the company’s ability to improve utilisation of devices post-pandemic, with Wilsons analysts in particular noting a case for the use of nasal high flow products outside of intensive care units in a post-covid world.

Largely, market analysts are in agreement that Fisher & Paykel will experience a normalisation of earnings, although expected timelines for recovery differ. Further, new virulent strains or surges in covid cases, particularly in under-vaccinated regions, could spike a faster than anticipated recovery.

While Jarden expects the stock price to suffer in the wake of the company’s guidance announcement, the broker is Overweight rated with a target price of NZ$25.70 believing the path to normalisation is accounted for in the share price. The broker reduced its net profit forecasts -5%, -11% and -7% through to FY24, allowing for conservative revenue growth in consumables, and anticipates earnings to normalise over the next eighteen months

Despite acknowledging the $300m recurring revenue opportunity in Fisher & Paykel’s expanded device base, JP Morgan warns the company is about to enter a period of uncertainty as the industry stabilises. The broker, who is Neutral rated with a NZ$27.00 target price, expects a near-term contraction of earnings until pre-pandemic utilisation rates are achieved which it anticipates will take at least three years.

Citi, also Neutral rated and with a target price of NZ$28.50, expects a sales and profit decline in FY22 and FY23 to challenge in the near-term but maintains the large opportunity for Fisher & Paykel should support annual double digit revenue growth from its Hospital division over the next decade. Citi analysts expect revenue results in the coming financial year will rely on hospital utilisation of installed devices. 

Citing difficulty in getting a clear read on the market outlook, Credit Suisse notes use of Fisher & Paykel’s nasal high flow therapy outside of covid applications remains constrained and will need to be addressed by the company to improve the sales outlook. The broker is Neutral rated with a target price of $27.00, and forecasts a -5% year-on-year decline in hospital consumables sales in the first half of FY23, before flat sales growth in the second half.

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